True sale
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The Law and Lore of Repackaging
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“True sale” is an accounting concept relating to the sale of assets by outright title transfer.
Historical purpose: being sure the buyer can keep it
A “true sale” is one where the buyer takes the property “unencumbered”: without restrictions imposed by the seller on the buyer’s right to do with the property anything any outright owner could do.
The seller should not be able to tell the buyer what it can do with the asset, nor be entitled to direct its redelivery to the seller, future repurchase by the seller, or onward disposal to anyone else. (There is nothing really to stop the buyer encumbering the asset in favour of someone else by her own choice. just as long as the seller didn’t make her do that.)
A “true sale” ensures that in the seller’s insolvency there is no chance the seller’s liquidator can claim the disposal didn’t amount to a “true sale” for accounting purposes, and therefore recharacterise the transaction as a loan, unperfected pledge or other form of security which may be treated less favourably in the distribution of insolvency proceeds.
Modern purpose: making sure the seller gets rid of it
In the global financial crisis we saw, of course that the opposite was just as true: it wasn’t the buyer trying desperately to hang on to the diamonds and gemstones bequeathed it by a failing broker, but to the contrary, the buyer arriving with a pitchfork mob at the broker’s reception demanding to return the dented, rusting cheapest-to-deliver piece of crap you gave it, and instead to have its money back. In particular, mezzanine tranches of CDOs. Legally, if it was a binding true sale, a buyer could not do this.
Legally.
True Sale opinion
Thus “true sale” analysis — required by an accountant, though obliged to be carried out by a lawyer, and yes there is a bit of a dissonance there — would be wrapped in a “would-level opinion” from an (ideally magic circle) law firm, confirming that the disposal did indeed amount to a true sale and would, if challenged by a liquidator, be enforceable as such. This may segue into a tedious discussion about the technical legal meaning of the word “equivalent”.
Of course, the esoteric legal position, and grubby reality of the matter, are quite different. “Do what thou wilt shall be the whole of the law”, as that famously devilish jurist, Aleister Crowley said.[1]
For two reasons. One, if you sell something, even with a would-level true sale opinion, to a valued client, it promptly blows up and the client comes back to you, fuming, asking, “what the bloody hell do you call that, you blaggard?” then it is a staunch senior relationship manager indeed who will coolly retort “I call that your freaking problem, snapperhead. Don’t let the swing doors bang your arse on the way out.”
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References
- ↑ Okay he wasn’t a jurist. But he was devilish.